Think long and hard on income averaging
Healthy profits will lower tax rates but opt in or out at your peril
It has generally been a good year for farmers, even if you don't feel too flush after all the outstanding bills from last year have been paid off.
All the experts predict that the gradual dismantling of the EU's protectionist policies in recent years will ensure that volatility is here to stay for farm prices. The dairy sector has been a textbook example of this since the record highs of 2007, followed by the record lows of last year and the return to decent prices again this year. Weather variations have only served to intensify the fluctuations in farming fortunes.
But what has any of this got to do with tax? Income averaging is an alternative method of assessment that was provided for farmers several years ago to allow them to cope better with fluctuating farm incomes.
Normally, income tax is assessed on what is described in the accountancy trade as the 'current year basis'. However, income averaging allows farming profits to be assessed for a particular year on the basis of the average profits of the three years that ended in that particular tax year. This has now become known as the average basis of assessment (see example 1).
However, not every farmer is entitled to use the average basis. It is only available to you if you elect to be charged in this way. In addition:
(a) You must have paid your income tax on the normal 'current year basis' in respect of your farming profits for the previous two years;
(b) You or your spouse must not have another business either solely, in partnership or through a company in which you or your spouse are directors and able to control more than 25pc of the share capital in that company.
Once the election is made the profits are assessed each year on the average basis, until: